Transcription

1 September 22, 2006 What is Proper Tax Policy for Smokeless Tobacco Products? by Gerald Prante Fiscal Fact No. 65 While there exist a large literature and extensive policy discussion on the issue of cigarette taxation, smokeless tobacco has received comparatively little attention. In recent years, controversy in many state legislatures has erupted over the proper way of taxing smokeless tobacco. The goal of this Fiscal Fact is to clarify the rationale for excise taxation in general, and specifically to explain the proper method of taxation of smokeless tobacco products and how it compares to cigarette taxation. The Fallacies of Current Tax Policy on Smokeless Tobacco Products Even though the federal government taxes smokeless tobacco at a per unit rate based upon weight, most states tax it based upon the sale price. This can be seen in the following table of the tax rates on smokeless tobacco across the country. Table 1: Smokeless Tobacco Tax Policy Is Highly Inconsistent Across States State Tax Rate on Moist Snuff Tobacco (MST) Type of Tax Alabama 2 cents per typical can 1 Per Unit Alaska 75% of wholesale price Ad Valorem Arizona 13.3 cents per ounce Per Unit Arkansas 32% of manufacturer s price Ad Valorem California percent of wholesale price 2 Ad Valorem Colorado 40% of manufacturer s price Ad Valorem Connecticut 40 cents per ounce 3 Per Unit Delaware 15% of wholesale price Ad Valorem Florida 25% of wholesale price Ad Valorem Georgia 10% of wholesale price Ad Valorem Hawaii 40% of wholesale price Ad Valorem Idaho 40% of wholesale price Ad Valorem Illinois 18% of wholesale price Ad Valorem Indiana 18% of wholesale price Ad Valorem Iowa 22% of wholesale price Ad Valorem Kansas 10% of wholesale price Ad Valorem Kentucky 9.5 cents per unit 4 Per Unit

3 To answer these questions and determine which states, if any, are practicing proper tax policy, we must develop a framework for explaining proper tax policy with regard to smokeless tobacco. Tobacco taxation policy should follow the framework of three crucial questions: (1) Should products like smokeless tobacco have a special tax imposed? (2) By what method should they be taxed, i.e. based on the sale price (ad valorem) or per unit? (3) What is the proper level of taxation? Should Tobacco Products Have a Special Tax? Assuming that the role of government is to prevent individuals from harming one another, and not to prevent individuals from harming themselves, then special taxes on tobacco products should exist only if those products impose significant costs on third parties. A frequently cited example is the healthcare costs to other taxpayers associated with tobacco consumption. 1 Another often cited external cost of tobacco products, cigarettes in particular, is second-hand smoke both in public places and in homes where children reside. Smokeless tobacco, however, imposes no such harm. Other costs unfairly imposed on society from tobacco consumption have been cited, such as the unattractiveness of witnessing certain behavior associated with chew tobacco, and the message children receive as a result of viewing adult tobacco consumption. To the extent that tobacco imposes undue costs on society, specific taxation of the product may be warranted. But a government official who merely desires to influence individual consumption decisions because of his own anti-tobacco sentiment cannot be justified by an appeal to principles of sound tax policy. By What Method Should Tobacco Products Be Taxed? There are two methods of levying an excise tax on any product. The first and most common type of excise tax is a per-unit tax. In this case, the tax is independent of the price of the product. The other type of excise tax is an ad valorem tax, which is akin to a typical general sales tax where the tax is a percentage of the sale price. Regardless of the rationale for the government s attempt to limit tobacco consumption via taxation whether it is through the proper framework of controlling for negative costs imposed on others or through the authoritarian method of trying to control individual decisions tobacco products should be taxed via a per-unit tax. The harm caused by a unit of tobacco is essentially unrelated to its price. A $5 pack of cigarettes would not impose any cost to society or harm any individual more than a $2 pack of cigarettes would. With respect to cigarettes, most tax-levying officials have properly understood this because every state imposes the tax based on the number of cigarettes, not based upon the sale price.

4 However, with respect to smokeless tobacco, most states have gone in the opposite direction of sound tax policy, and have imposed ad valorem taxes, which are based upon the sale price of the smokeless tobacco. Only nine states impose the tax on a per-unit basis even though the federal government taxes moist smokeless tobacco based on weight, which is essentially a tax on quantity, and is the proper way of taxing the product. It is not logical to base the tax on the value of the product. A $6 can of premium smokeless tobacco does no greater harm to the user or to society than a $2 brand of generic smokeless tobacco, but under the current system in most states, the premium brand is charged a tax three times that of the generic brand. Much of the effect of this ad valorem tax is merely to encourage more consumption of the inexpensive brand, thereby making irrelevant much of the government policy designed to limit the quantity of tobacco consumed. What is the Proper Level of Taxation? Now that we have defined the conditions under which a government is justified in imposing a special tax on tobacco and explained how that tax should be levied, the obvious question is what the level of taxation should be. In standard economic theory, a tax designed to compensate for a negative externality imposed on society should be levied on a per unit basis and should equal the difference between the social cost of the good (the cost to society at large) and the private cost (the cost to individual consumers). Therefore, if the social cost of tobacco consumption is greater than the total private cost, then the tax should be set at a level that will make the two costs equal, thereby improving overall societal well-being. The problem that governments face is calculating the social cost of tobacco and comparing it to the private cost. Often, those with certain agendas try to overstate the difference between the private cost and the social cost of tobacco in order to impose their principles of morality on everyone else. What constitutes a true cost to society is therefore always a subject of disagreement and should be carefully calculated. Policymakers should be clear about the factors involved in their calculations when they recommend a level of taxation. Summary Even if the goal of policymakers is to reduce tobacco consumption, in a free society this should be done solely for the purposes of correcting for social costs unfairly imposed on others, not to impose some individuals moral agenda on everyone else. Taxes should not be used to impose morality; social engineering through the tax code is never sound tax policy. Because the proper purpose of tobacco taxes is to correct for market imperfections, taxes should be levied only up to the point at which the tax per unit equals the difference between the social cost of a unit of tobacco and the private cost of a unit of tobacco. This can only be accomplished with per-unit excise taxes because the dollar value of the tobacco consumed is irrelevant with respect to reducing overall consumption of tobacco. Footnote 1 Some economists will note that any healthcare cost imposed on society is technically a transfer that has been created by government through a quasi-socialized healthcare

5 system. Moreover, while it is commonly assumed that individuals unhealthful habits must necessarily impose healthcare costs on society, this is not at all the case. A field of economics known as social cost accounting attempts to discern the aggregate fiscal effects of different types of behavior, and its findings are often counterintuitive. Smoking, for example, has been found to not impose healthcare costs on nonsmokers. To the contrary, current federal, state, and local fiscal regimes have been found to transfer tens of billions of dollars from smokers to nonsmokers. See, for example, Patrick Fleenor, Who Bears the Ancillary Cost of Tobacco Use?, Tax Foundation Background Paper, No. 36 (January 2001) Tax Foundation Tax Foundation 2001 L Street NW Suite 1050 Washington, DC Ph: (202) Fax: (202)

Your Guide to Real Estate Customs by State First American Title Real Estate Customs by State Yes No State Title Insurance Rates Form of Conveyance State Encumbrance Forms Attorney State or Deed Transfer

State Tax Credits for Historic Preservation A State-by-State Summary www.nationaltrust.org policy@nthp.org 202-588-6167 Chart last updated: July 2007 States with income tax incentives States that do not

Nevada Single Document Rule Nevada Law Nevada law requires that all agreements in a motor vehicle retail installment transaction be contained within a single document. Further, in a consumer transaction,

SPECIAL PROPERTIES GROUP INDUSTRIAL SERVICES CBRE LIMITED INDUSTRIAL SERVICES WWW.CBRE.COM/SPG SPECIAL PROPERTIES GROUP The Special Properties Group provides specialized acquisition, disposition and consulting

U.S. Home Price Insights Report FEATURING CORELOGIC HPI Through September 2015 with Forecasts From October 2015 CoreLogic HPI National Overview With the September release, the CoreLogic HPI posted a gain

Foreclosures www.rogueinvestor.com Copyright 2014 Rogue Investor Facts about foreclosures! 1.2 million homes are still in the process of foreclosure (January, 2014)! 2009: 1 in 84 homes were in foreclosure

I. ABOUT THE UNITED TRUSTEE ASSOCIATION The United Trustees Association ( UTA ) is a multi-state professional association comprised of trustees under deeds of trust and members working in industries that

August 216 Report on Nevada s Housing Market This series of reports on Nevada s Housing Market is presented by the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas. These reports

July Report on Nevada s Housing Market This series of reports on Nevada s Housing Market is presented by the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas. These reports

Short Sale Guide SunTrust Mortgage, Inc. (STM) is dedicated to careful counseling and responsible lending, and we view foreclosure as the last resort for customers experiencing financial difficulty. Foreclosures

February Report on Nevada s Housing Market This series of reports on Nevada s Housing Market is co presented by the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas and the

March Report on Nevada s Housing Market This series of reports on Nevada s Housing Market is co presented by the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas and the State

March Report on Nevada s Housing Market This series of reports on Nevada s Housing Market is co-presented by the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas and the State

MedicaidEligibility Planning FamilyAssets htp:/www.familyassets.com Protecting Your Home From Medicaid Claw back Table of Contents: 1. Introduction 2. How does it work? 3. Who is it for? 4. How do I begin

June 214 Report on Nevada s Housing Market This series of reports on Nevada s Housing Market is co-presented by the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas and the

SALVAGEBOATSAUCTION.COM BUYER TERMS AND CONDITIONS Last Updated 06/21/2017 REGISTERING TO SALVAGEBOATSAUCTION.COM (WEBSITE) INDICATES THAT YOU ACCEPT THESE TERMS AND CONDITIONS (T&C) SO PLEASE READ VERY

Phoenix, Central and Northern Arizona End of Year Housing Report 1-8-354-5664 LongRealty.com 217 End of Year Housing Report SALES & INVENTORY Housing market trends For the overall real estate market in

Florida State University Law Review Volume 21 Issue 2 Article 2 Fall 1993 Florida's Hospital Lien Laws Meta Calder Follow this and additional works at: http://ir.law.fsu.edu/lr Part of the Health Law and

STATE OF AFFORDABLE HOUSING IN NORTH DAKOTA 2010 REPORT Sponsored by: EXECUTIVE SUMMARY North Dakota is showing positive growth in a variety of economic factors the lowest unemployment rate in the country,

PUBLIC GRAZING IN THE WEST: THE IMPACT OF RANGELAND REFORM 94 Jeffrey T. LaFrance 1 INTRODUCTION The general public seems to believe that public lands ranchers pay substantially less for livestock grazing

The constitutional amendment increasing the amount of the residence homestead exemption from ad valorem taxation for public school purposes from $15,000 to $25,000, providing for a reduction of the limitation

FEDERAL LAND RECORDS IN ALABAMA by Robert S. Davis Family & Regional History Program Wallace State College PO Box 2000 801 N. Main Street Hanceville, AL 35077-2000 Alabama is a federal land state, which

Gwen Volk CPM, NAHP-e, FHC,SHCM, HCCP, FHC, RAM GWEN VOLK INFOCUS, INC. The information on the handout, on the slides, and presented verbally in this course is intended as a guide. Agency compliance manuals,

5 RENTAL AFFORDABILITY While affordability has improved somewhat, the share of renter households with cost burdens remains well above levels in 21. Although picking up since 211, renter incomes still lag

State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Nebraska Department of Revenue Amends Apportionment Regulations to Incorporate Market-Based Sourcing On December

ARBITRATING REAL ESTATE AGENCY DISPUTES: THE COMPLEX LANDSCAPE OF REAL ESTATE AGENCY RELATIONSHIPS AND DUTIES Thomas A. Musil and John I. Halloran* The concept of agency is an integral part of the real

Texas Municipal Utility Districts: An Infrastructure Financing System I. The History of Special Districts A. Overview Large population growth requires the development of new communities. Massive capital

Broker/Agent Agreement This Agreement is made and entered into by and between LegalShield (hereinafter LS ) and, (hereinafter Broker/Agent ). SECTION ONE: AUTHORITY OF BROKER/AGENT A. Appointment and Authority.

HOUSINGSPOTLIGHT National Low Income Housing Coalition Volume 2, Issue 1 February 2012 The Shrinking Supply of Affordable Housing One way to measure the affordable housing problem in the U.S. is to compare

How much would you pay today for... Chapter 8 One hundred dollars paid with certainty each year for five years, starting one year from now. Why would you pay less than $500 Valuation Using the Income Approach

Understanding Mississippi Property Taxes Property tax revenues are a vital component of the budgets of Mississippi s local governments. Property tax revenues allow these governments to provide important

Guarantees of Title Ownership of land consists of: 1. A good written title with the right of possession. 2. Possession with the right to acquire written title as a result of a lawful, unwritten conveyance.

federal register Wednesday September 15, 1999 Part III Department of Housing and Urban Development Statutorily Mandated Designation of Difficult Development Areas, and Supplemental Designation of Qualified

Uniform Law Commission develops transfer-on-death deeds By Susan N. Gary Background In 2006 the Uniform Law Commission appointed a drafting committee to develop a uniform act creating transfer-on-death

The following are instructions and forms needed to transfer shares of common stock ( Shares ) of Benefit Street Partners Realty Trust, Inc. (the Company ). 1. The transferor is the entity that is the current

An Update on the Activities of The Appraisal Foundation Prepared for the Association of Appraiser Regulatory Officials David Bunton, President October 13, 2017 Q&A Forum Web-based forum Any question relating

The Law on Valuing Mineral Interests in the Context of Condemnation Cases Primer on General Valuation Principles in Condemnation Cases In general, just compensation in a condemnation action is measured

How a Lady Bird Deed Works These deeds are also called enhanced life estate deeds. With a standard life estate deed, you could name a beneficiary to inherit your property while you keep ownership of it

Real Estate Appraisal Professional Standards Summary This proposal is to amend the Florida Administrative Code (FAC) to allow a Certified Residential Appraiser or a Certified General Appraiser to use standards

GOING BY THE BOOK OR WHAT EVERY REALTOR SHOULD KNOW ABOUT THE REALTOR DUES FORMULA EDITORS NOTE: This article has been prepared at the request of the NATIONAL ASSOCIATION OF REALTORS by its General Counsel,

SHORT SALE AUCTION MARKETING AGREEMENT This Short Sale Auction Marketing Agreement (this Agreement ), shall be effective as of the date that the Property is listed on the Website and shall expire thirty

Houses For A New World: Builders And Buyers In American Suburbs, 1945-1965 By Barbara Miller Lane If you are looking for the book by Barbara Miller Lane Houses for a New World: Builders and Buyers in American

HOMES USA International Buyer s Guide WHY CHOOSING THE U.S. IS SO POPULAR HOT LENNAR MARKETS. WHERE TO LIVE AND WHAT TO BUY HELPFUL TIPS. HOW LENNAR MAKES HOME BUYING EASY 2014-15 Global Edition // USA

Norman Martin Statement of Schindler Elevator Corporation, Inc. in SUPPORT of H.B. 2356, an Act related to Elevators, Escalators and other Building Transportation Equipment Standards February 3, 2016 Mr.

JOHN BELLE TRAVEL FELLOWSHIP John Belle traveling in England between studies at the Architectural Association in London. 2018 2018 JOHN BELLE TRAVEL FELLOWSHIP The John Belle Travel Fellowship is a $10,000